How to Build a Board of Directors That Actually Works
I’ll give you the bad news first: When you’re the founder of a growing company, at some point you’re probably going to lose control of your board.
A board of directors is a legally required entity that is responsible for making a company’s most critical structural, financial, and directional decisions. At the very inception of a company, the early startup stage, the board consists of the founder or co-founders, and that’s it. But soon — very soon if the startup is successful in raising money — that board will expand.
As the board grows, the founders will have decreasing control over who is on the board, how it operates, and any constraints on the limits of its power. It can be like creating Frankenstein’s monster — awesome that you brought it to life, until it tries to strangle you.
The good news is that you have strategy and influence on your side, and if you’re careful with your decisions from the very beginning of your growth stage, you’ll have a board that works with you, even for you.
Regulate voting power as your board grows
I’ve advised several companies on board size, makeup, and the logistics around how they operate. The one lesson I’ve learned, one that’s also echoed across the lifecycles of the startups I’ve founded or had a seat on the executive team, is that control over voting gets lost before you realize it.
For most startups, boards of directors usually consist of founders and lead investors from each round of financing. So as an example, your board might be you, your co-founder, and the lead investor from your seed round. An odd number of members is preferable, so there are no ties when voting on big decisions. And because you want to maintain internal control, the tiebreaker board member should be a member of the founding team. In other words: two of you, one of them.
Now, a seed round is early in the life of a startup, and you probably still had a lot of control over where your seed money came from, and therefore who your third board member might be. But that’s likely where total control ends. The only control you’ll have over future board expansions is whom you choose as the lead investor of your future rounds, if you get to choose, which means you’ve got investors fighting over you, which is rare.
Thus, moving forward, your control is reduced to whether or not you take an investor’s money. Good luck with that.
But then, what do you do when that new investor board member comes on? Ditch your internal member? That means you lose even more control. So if your seed lead won’t step aside and give their seat to the Series A lead, it’s time to pull in an independent director.
The more members you have, the less likely they’re going to agree on every last detail.
This is what happened with my last startup, Automated Insights, when we raised our Series A. We needed an independent, and we chose Scot Wingo, co-founder and former CEO of local company ChannelAdvisor, which he had taken public. We knew him well (in fact, I work with him now at my current company Spiffy), and he knew our business and our market and our industry well. His track record (and general business acumen) made him a shoo-in with our current board and investors, and it was win-win.
Finally, keep your board as small as possible. The more members you have, the less likely they’re going to agree on every last detail.
Get to agreement, if not consensus, using your influence
Regardless of where your startup is in the growth cycle, the vision for the company’s future should always rest on the shoulders of the founding team, not the board. Once control of the vision gets usurped by the board, the company has ceased being a startup.
Even when you retain voting control, your board needs to come to agreement on a lot of decisions that will dictate company vision. And even when you win a vote, if it’s not unanimous — or worse, if it’s split and contentious — you could be creating a rogue element within your board.
A board member waiting for an “I told you so” moment is poison.
Everyone on the board has to be on the same page on company strategy, whether they’re in love with that strategy or not. In my experience, most contention arises from gaps in experience or personality, and maybe you can’t manage that, but you can certainly influence it.
Once control of the vision gets usurped by the board, the company has ceased being a startup.
Again, decisions on board makeup are hugely important, as in if you make a single poor decision about who should be on your board, you’re dead in the water. You need board members who won’t just vote with you, but who can help build consensus.
So when you do get a choice as to who will fill a seat, that person needs to have enough experience with the company, the market, and the industry to be able to argue for and justify decisions that are aligned with the founding team’s vision. And obviously, they have to fully understand that vision to be able to complete the connection.
Personality-wise, watch out for ego. Your investors and independents may have way more experience than you, but you’re driving the mission, not them.
Set constraints on power by clearly defining duties
So now you’ve got the right people in place and you’re confident enough in your influence to be able to steer your board toward agreement. One last trap: For your board to be truly effective, all that agreement needs to propel the company forward. And one way to become ineffective really quickly is if not everyone on the board agrees on what the board should and shouldn’t be doing.
In general, a board of directors should be in charge of, well, direction, and not day-to-day. They should:
- Approve high-acceleration initiatives like acquisitions and fundraising.
- Approve heavy pivots in company strategy, especially when they require additional burn.
- Approve any big spend like office space or long-term vendor contracts.
- Approve and give guidance for overall company strategy.
- Approve senior level management hires and compensation.
- Approve any equity distribution.
- Approve budget — definitely annual, sometimes quarterly or monthly.
- Monitor revenue, growth, costs, and burn.
- Approve legal stuff when it happens.
- Approve some large, direction-altering customers and partnerships.
- Suggest changes due to profit and loss, budget adherence, and progress.
- Fire the CEO. Seriously, they’re the only ones who can.
What the board shouldn’t do is anything involving the day-to-day management and execution. They shouldn’t:
- Ever be in any management or working meeting unless that meeting specifically pertains to a board-level matter.
- Advise or question day-to-day activities unless there are recurring issues.
- Approve any low- to mid-level customer acquisition or partnerships.
- Approve low-to-mid level hires and compensation, unless that hire or comp puts the budget in peril.
- Fire anyone other than the CEO.
Your board should be a big help, not a dark cloud hanging over the company. You’ll be surprised at how much of that is in your control, but honestly, you’ll often be surprised by how much of it isn’t. You’ll always have ways of getting your board on track and effective. Just remember to help them help you.